What’s Stansberry’s “Dirty 30” All About?

Checking out the teaser pitch for Stansberry's Big Trade service

Several folks have been writing in with questions about Stansberry’s “Dirty Thirty” promotion for his Big Trade newsletter ($3,000 for three years, no refunds), so that’s where we’re pointing the Thinkolator today.

The pitch is not a new one — Porter Stansberry preannounced his “Dirty Thirty” idea last Fall and started selling subscriptions around November, I think, and the list has probably changed a bit over the past year… presumably he has been adding new recommendations, and maybe taking profits on some of the stocks that have fallen sharply this year (several of his short targets have certainly fallen in 2017 so far, even if we don’t know exactly which 30 companies he has chosen — we know he specifically has called out big retailers and mall REITs and some oil, auto and lending companies, and almost everything in those sectors is down or flat this year).

The basic idea is fairly simple: He thinks that the low price of options, combined with the festering crisis in corporate debt (lots of companies that he thinks will be unable to pay their interest, or roll over their debt when it comes due, leading to a wave of bankruptcies), presents an opportunity for betting against debt-heavy companies in the options market.

If this is an unfamiliar concept to you, it’s basically just “buying put options” — but he’s more specifically talking about long-term predictions, since it’s devilishly difficult to predict when there will be a credit crisis with any precision, so that would mean buying very long-term put options, most likely LEAPs where available (most options are available only going out about nine months or so, but LEAP options, when they’re available, go out a couple years (with only January expirations)… so right now, for example, to use an example of a heavily indebted stock that Porter has publicly criticized in the past, Ford Motor, you could buy January 2019 put options and get about a year and a half for your theory to play out.

How would that work? Well, in the case of Ford the likely options would be the January 2019 put options at strike prices of $8 or $10, since those are the options that have very large open interest and heavy trading volume (which makes it easier to get orders filled at reasonable prices — and means there’s “room” in the trade for a newsletter editor to recommend it to 1,000 of his closest friends without completely blowing up the price).

If those terms don’t make sense to you, “Open Interest” is just the number of options contracts that exist in the market at that expiration date and strike price, “volume” is the number of contracts that have changed hands or been created or closed that day.

Right now, the $10 put option for Ford would cost you about 85 cents a share, and the $8 put would be about 37 cents. Options contracts represent 100 shares each, so the minimum you could put into that trade would be $37 (or $85), plus commission… the commission goes down a bit if you buy in more, so let’s assume you buy ten contracts of the Ford $8 Jan 2019 puts for $370.

How do you make a profit? By seeing F shares trade below $8 before January of 2019. Ford shares right now are at about $11.70, so this is a bet that there will be a substantial fall in the share price… though it’s not overwhelmingly dramatic, you don’t need Ford to go bankrupt for this trade to work, you just need the stock to fall by 30% or so to generate a pretty nice profit.

Of course, in order for it to turn into a “windfall,” you’d need Ford’s share price to fall dramatically — preferably to near zero. If F shares fall to $5, then the $8 put option you paid 37 cents for is now worth $3… if they fall to $2, that same 37 cents turns into $6. That’s a nice return on a very speculative trade, though the other side is, of course, that if Ford keeps trucking along, rising a bit or staying flat or even falling just 10% or 20% over the next year and a half, you’re likely to see the value of your put option decline to 0. Most speculative option purchases don’t work out, because you have to be correct in the timing, direction, and size of the expected move in the stock price.

But, of course, if you’re convinced, as Porter appears to be, that a real credit crisis is in the offing over the next year or two, and that this will bring down many of the big US companies who rely on a steady diet of debt issuances or who are overlevered, then it could certainly work out if you make a bearish bet on 30 of those companies using options — options are very levered, so it would only take a couple really successful trades to cover the cost of ten trades that wash out and go to zero. You do have to be right about the direction of the market, about that big trend of collapsing share prices in a few sectors, and about the timing (you don’t have to be super-precise about the timing if you’re buying LEAP options out a couple years, like you would have to be if you were speculating on a collapse in a matter of a few months, but even predicting bankruptcy within a 15-20 month period is no mean feat).

I don’t know whether Ford is still a company that Porter would bet against, but it fits his general theories pretty well — they have a huge amount of debt, including, according to Ycharts, close to $50 billion in debt that matures within the next year or so (and another $90+ billion in long-term debt), and the business is certainly not as rosy as it was a year or two ago — revenue is weak, earnings are falling, and the residual value of cars that are coming off of leases is much lower than expected. Add on the worry that Porter comments on about a consumer debt crisis in auto loans, and you can see how he would logically continue to bet against Ford.

The same argument probably holds true with the big car rental companies, who also carry huge amounts of debt and suffer as the value of the cars they sell is dropping, and Porter also specifically calls out Santander (SC) as a company he thinks will collapse further because of its leading position in subprime auto lending, so you could probably find some other candidates in that group.

But what folks have been asking me about are the hints Porter has dropped about some other specific companies that he’s added to the “Dirty Thirty” list of debt-happy or “distressed” stocks to bet against. So what might they be?

Here are the hints dropped for one of them:

“This $1.5 billion stock is going to $0

“To begin with, you need to know about one particular company whose name I guarantee you’d recognize.

“It’s a Texas-based retailer that owns hundreds of stores in malls nationwide.

“At first glance, you’d think it’s a great company… worth roughly $1.5 billion on the stock market. All its press statements are upbeat… often showing attractive women smiling.

“It’s garbage.

“The whole company belongs in a toilet….

“This Texas-based company, for example, can no longer afford to even pay interest or maintain its properties…

“Over the past 5 years, it has lost more than $3.6 billion. Meanwhile, it paid $1.75 billion in interest over the same period….

“… this company owes $4.4 billion in debt overall. It’s already burned through $3.6 billion in cash over just the past 5 years. Meanwhile its store revenue has fallen 40% over the past decade.”

That’s almost certainly JC Penney (JCP), which has certainly been in the headlines for its precipitous stock price decline over the past five years (following Bill Ackman’s failed attempt to remake the chain). The company’s operations seem to have stabilized a bit over the past year, though they certainly aren’t growing in any exciting way I can see… they’re roughly breaking even on a cash basis, and continue to have a heavy debt burden.

That said, the stock has already fallen pretty far, so it’s at about $5 now — it was in the $40s during the Ackman enthusiasm a few years back, but over the past three years has mostly vacillated between $5-10 as sentiment has shifted up and down… lately that sentiment is pretty bleak.

So the options aren’t necessarily all that cheap, though they are actually cheaper than I expect them to be — the big chunks of open interest for JCP put options are at $5 in January of both 2018 and 2019, so that’s an easy place to start. Betting on a put option for January 2018 at a $5 strike price would cost you about 87 cents today, which means you break even if the stock is below $4.13 by January, and making the same bet for January 2019 would cost you about $1.45. So the maximum return is about 200% if the stock goes to zero by January 18, 2019 (your $1.45 becomes $5).

Could JCP go bankrupt? Of course. Malls are seeing declining traffic, department stores are famously unpleasant businesses these days, and revenue is declining despite a general pickup in the economy in recent years (though the recent decline is far, far less dramatic than the collapse of 2012 and 2013 when Ackman’s group blew up the business in their attempt to save it… and revenues did actually rise in 2014 and 2015 as new management tried to right the ship, so improvement is not impossible.

Here’s more from the ad:

“… right now, the stock is still trading near ‘business-as-usual’ levels from 2014, which creates the opportunity I’ve been telling you about.

“Quite simply: As soon as this company runs into problems this year, a lot more people are going to realize it’s garbage. Overnight, the share price will collapse 50% or more… just as I saw with General Growth Properties in 2014.

“As the stock crumbles, you could make 5 to 10 times your money, very quickly… with a single investment play.”

There are some ways to make as much as 5-10X your money in JCP put options, though those $5 strikes wouldn’t get you there unless the company actually does go to zero during your expected timeframe — in order to get returns like that on a low-priced stock, you’d have to go further out of the money or make a bet on a shorter timeframe, maybe by buying something like the January 2018 $3 put options for 15 cents. That way if the stock goes to, say, $1.50 by then (a 60%+ collapse in six months), you could turn your 15 cents into $1.50.

That’s not something I’m suggesting, of course, and I don’t know specifically what option trades Porter might be recommending — it’s just a feasible example of the kind of wager you have to make to generate dramatic returns. And a reminder that being right about a big collapse also means being right about when it happens.

Porter indicates in the ad that he thinks the corporate debt crisis is underway now, with junk debt coming due from the record bond issuances during the past seven years of falling interest rates, and that it will “escalate in 2018” and “peak in 2019-20.” So if you’re in agreement on that (and it is logical, though being certain about timing is often a way to make yourself look foolish), then there are certainly plenty of debt-dependent stocks you could choose for yourself to bet against.

Does Porter hint at any other specific ones? Yep, a cellphone carrier. And there are only a few of those, so this ought to be pretty easy… here are the clues:

“One of America’s largest cellphone carriers is on its knees.

“You’d be shocked if I told you its name. In fact, you or someone you know might be one of its 30 million paying customers.

“But the truth is, its free cash flow has totaled negative $6.3 billion over the past 3 years. And it gets worse. It’s had no revenue growth and not a single dime in profits in the past 10 years.

“Meanwhile, it’s spent more than $17 billion over the past three years trying to build out its infrastructure.

“The whole company is doomed.

“It currently has $32.6 billion in net debt. As a result, Standard & Poor’s has downgraded the company’s credit rating for two consecutive years. It currently has a ‘junk’ rating 5 notches below investment grade.”

We’re also told that the company’s interest expense is more than $2 billion annually. And that it has “absolutely no chance of survival.”

“I predict this company’s stock will fall by more than 80%.

“By placing a single trade today — for as little as $30 a stake — you could make an 900% maximum potential upside… enough to make you 9 times your money in the coming years.

“In fact, even if the stock falls only a fraction of that amount, I predict you could still make at least 233% gains by following our recommendation.”

So that’s got to be Sprint (S), which won’t surprise many of you — it’s clearly distressed, has been through several machinations as they try to compete with the much larger AT&T and Verizon and the upstart T-Mobile in the US cellular service market (with the most obvious solution being to merge T-Mobile and Sprint, though that was quashed by regulators three years ago and may or may not return as a strategy again), and does carry a lot of debt and have a heavy debt service load.

It also has a majority owner in Chairman Masayoshi Son, who can be unpredictable and whose Softbank owns 80% of the company. So pretty much anything could happen, I suppose — they do own valuable assets in terms of both spectrum and customer accounts, they have been pouring vast amounts of money into upgrading their network, and it’s clearly a business that relies on easy access to debt.

That said, they have been able to get that debt pretty easily — despite the relatively low debt rating and the clear challenges Sprint faces, their five-year bonds are currently trading at yields of about 4-5%, so the bond market is not really assessing these bonds as distressed or the company as being on the verge of bankruptcy. Porter might be right, but his opinion that the company is on the verge of a serious collapse is not really in steap with the consensus (which would make sense — if you agree with the consensus all the time, you don’t get much opportunity make money).

How would that work, the $30 stake that makes you nine times your money and a potential 900% upside? That doesn’t necessarily match any of the current options prices, but presumably Porter’s using data that’s a month or two old in this letter (it has a June date below the signature). If Sprint shares fall 80% over the next year and a half, say, that would mean the stock prices falls to about $1.70 or so… which would mean, for example, that if you bought the January 2019 $5 put options for about 60 cents today you would see a return of almost 500% (60 cents becomes $3.30). The same trade with a January 2018 expiration would be only about 16 cents, so there is that possible 900% return if Sprint falls by 80% over six months.

Though, of course, if Sprint only falls by 50% or 70% over the next six months, or over the next year and a half (or, God forbid, goes up or stays flat), your speculation expires worthless — that’s the nature of big leverage, you have to pay more for bets that have a higher probability of success (like a strike price that’s closer to the current price, or a date that gives you more time to be right, further out into the future).

So there you have it — yes, there are lots of companies who rely on corporate debt, and corporate debt has gotten so cheap lately that those companies have probably overindulged, and that might come back to bite them if the economy slows, or interest rates rise, or their businesses remain distressed and they have trouble refinancing their debt. And betting against those kinds of companies by buying put options is, if you diversify across a bunch of positions, one reasonable way to try to hedge a little bit by putting some negative bets into your portfolio… just remember that most of the time folks who speculate on options lose, it’s not an appropriate way for most folks to allocate a big chunk of their portfolio and unless you (or Porter) has a better crystal ball than I do in predicting exactly when disaster will strike, it’s probably better thought of as either a hedge or a wild speculation, with just a little smidgen of your play money.

I’m not agains speculating, and it’s good for all investors to consider bearish bets even if they do so just to gain some perspective on their long portfolios, but I don’t currently have any put options or short positions in my portfolio.

How about you? Have any bets on the demise of a stock or a sector you’d like to share? Think Porter’s “Big Trade” idea of betting on a corporate debt crisis makes sense? Let us know with a comment below.

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I have been a subscriber of Porter Stansberry’s and affiliated subscriptions for well over ten years. Over the years I can say that I have made more money than I would have been able to by myself. Just one deal – a recommendation to buy Constellation has returned a 10x in a very short period. I also invested in some of heir resource ideas and have lost money. So overall I am very happy with Porter and his publications. On the trade names above – you nailed all of them.

Mampilly recommends sprint due to cleaning up previous messes, even though there are no apparent suitors including Softbank and Stansberry says put options. I wonder if Antero Resources are on his list of LEAP puts.

Travis, as usual you are spot on. It’s all about the timing and diversification. I think the direction is right; the only question is how long will it take? And just a couple of winners will make a diversified short portfolio profitable.

We’re all taught in B school that the RISKIEST PLAY in the market is selling naked calls. “The potential loss is infinite.” In fact, the potential loss is not infinite, and can be managed by keeping an eye on the security and keeping the number of contracts reasonable. I have been doing it for years, with a number of advantages. First, the market is paying YOU for your time. Thus, if it takes longer for the target company to fall, you’re paid while you wait. Keep the exercise period short — 3-8 weeks out — and roll them over when… Read more »

One other point that Travis knows well but didn’t mention… another way to gain from this strategy is if volatility goes up. It’s (VIX) low right now, but if a market correction develops, the VIX and the price of essentially ALL option will go up. That could make this strategy pay off even if the stock hasn’t gone down. Just noting this, it’s the icing on the cake and NOT a reason to open this position.

Good point. Not to be counted on, since volatility has refused to rise despite the clear worries about market valuation and potential political or economic “black swan” events, but if there were a simple bet with good terms that you could use to bet on rising volatility (there isn’t, as far as I can figure) that would be one of my highest conviction bets over the next year.

This is risky business indeed. So long as interest rates remain low, debt is not going to be the bogey many of these newsletter writers would have you believe. Debt has been so cheap in the past 10 years that corporations rightfully took full advantage, retiring o/s shares. It makes their ROI look exponentially better. Rumors of Ford’s demise are frequent and plentiful. But they pay good dividends, and have done so for a long, long time. And so long as interest rates remain low, rolling the debt over is the game all big corporations will play. And they can… Read more »

I got this small gold stock from someone recently: Osprey Gold Development Ltd OTCQB: OSSPF. I have listen to quite a few of Stansberry presentation lately, so I think I may have gotten this from him, but not sure. I bought a 1K shares at .18. It has moved since.

Speaking of the Dirty Thirty, I was sent this list of 30 companies, I think by mistake. But for some reason I did not keep the email.

Interesting he’s predicting Ford will go under considering the following: Ford is a “buy” on Motley Fool Stock Advisor letter (David). It is listed as a “moderate buy” on Tipranks Analysts Consensus. A “buy” on SmartConsensus report. I have the stock and its been a disappointment, but have trouble imagining the company going bankrupt. Sounds like a real long shot to me. I’ve bought options and averaged out over time, a loss. Now I sell options and they’ve been profitable. They’re risky.

David Stockman also runs a “short recommendation” service, called “Bubble Trading” which I sampled for a few months. At the time I abandoned the trial subscription, the most recent 23 closed recommendations would have averaged a return of MINUS 20 percent, for followers who invested an equal amount in each recommendation. That, plus a subscription fee in the $thousands did not appeal to me. At least Stockman offered a trial period with a 90% refund. He may even be correct, eventually, in the sense of seeing many of his picks produce huge returns, and only a few expiring worthless. The… Read more »

Many people seem to dislike Stansberry but I have found his advice about position sizing and stop losses to be rational and effective. I have also done well with recommendations from him and others of his writers. On the short side, Porter has often been right but early, so the recommendation gets stopped out. The group consensus at S&A seems to be that the market will “melt up” and then correct sharply, along with collapses in the stocks and bonds of over-leveraged firms. As a result of this view, they are advising how to make money on the way up… Read more »

Travis – this discussion should really be about Porter’s current campaign, “Who is Going Bankrupt Next in America?” The three stocks you mentioned are not the one in focus by Porter there: “A top Technology Company.” Have you seen this tease? Please review in a separate thread.

I think you’re probably talking about the same ad, though I haven’t seen the wording “top technology company” — that intro in his pitch now about the company “going bankrupt next” is, I think, primarily about Sprint.

I think Sears is the mostly likely bankruptcy. Valeant is in the running, though it has quite a few bullish supporters yet. MannKind looks pretty bad. Frontier Communication and Century Link don’t look too good. There’s always Tesla, but I don’t like betting against super-popular companies. Chipotle recently had another food contamination scare.

J.C. Penney could go either way. They seem to be run now by people who know retail, and who are doing things to revive it that make sense, like selling appliances.

From Boxie With car stocks, at the end of every decade there is is period when buyers sit on their hands and wait until the first decal year rolls around. This is based on the premise that a car re-sold, say, in 2023 which was bought in 2020 invariably has disproportionately more value than a 2019 model. Moreover manufacturers (and dealers) having to move unsold stock towards the end of the decade compounds the annual problem. Add this to heavy burdens of debt and rising interest rates Stansberry has a good case, but I think he may be a year… Read more »

I agree it’s a very challenged and extremely overlevered business, but be careful about having too much confidence in the timing — it’s been “ripe for puts” for years, and has still had a few points where it rose sharply. They rely on good pricing margins for LNG over domestic natural gas, so that’s the number to watch for Cheniere (they have sold almost all their capacity for a long period of time, but they don’t sell at fixed prices — the contracts they have that I’ve seen have them selling fixed quantities at whatever the then-average LNG prices are,… Read more »

Agree with Travis. I bought one (1) Jan 19 $20 put option on LNG, per a recommendation from Porter. It’s deep in the red, but still have about 17 months on the LEAP. Maybe not such a good idea tying up even a nominal amount of capital for so long and going that deep out of the money. Overall, though, I’ve had very good results with Stansberry Research/Oxford Club. I’ve learned to be very discriminating about what to follow and what not to follow in terms of their recos. Lou Basenese over at Agora is also a pretty good stock… Read more »

Of all the popular investment letters, Porter Stansberry is by far the best. His publications provide the ideas but you need to vet and indulge in due diligence to make money. My current investment comprises: 70 – 75% — Sell to open Put Options 20% — buy Call and Preferably Put Options Balance I buy stocks directly whose Options are not listed or I hardly buy a stock per se unless a good and solid stock has fallen a lot and hovering around 52 week low. Such pickings are for short term to take advantage of bounce back. Porter price… Read more »